Economic News
Higher Mortgage Rates Reduce US Single-Family Housing Starts and Building Permits
Single-family homebuilding in the United States fell to a two-and-a-half-year low in November, while permits for future construction fell as higher mortgage rates continued to dampen housing market activity.
The bleak report from the Commerce Department on Tuesday came on the heels of news on Monday that home-builder confidence fell for a record 12th month in December.
It placed residential investment on track to fall for the seventh consecutive quarter, the longest such streak since the housing bubble burst, which caused the Great Recession. As the Federal Reserve fights inflation, the housing market has borne the burden of the Fed’s quickest rate-hiking cycle since the 1980s.
“The Fed’s rate hikes are doing their job, exacerbating the slump in the residential housing construction markets,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Homebuilders have nowhere to hide. We don’t know what the rest of the economy is doing, but the housing market is plainly in a slump.”
Single-family housing starts, which account for the majority of new home construction, fell 4.1% last month to a seasonally adjusted annual rate of 828,000 units. That was the lowest since May 2020, when the economy was still reeling from the first wave of the COVID-19 pandemic.
Outside of the pandemic drop, single-family housing starts are at their lowest since February 2019. Single-family homebuilding fell in the South and Midwest, which are widely regarded as the more inexpensive regions of the country. It became more intense in the Northeast and West.
Starts for housing projects with five or more units increased by 4.8% to 584,000 units, the highest level since April.
The increasing demand for rental housing is driving multi-family housing construction, as higher mortgage rates force many potential homebuyers to stay renters.
According to Freddie Mac data, the 30-year fixed mortgage rate rose to more than 7% a few months ago, the most since 2002. Though the rate has now fallen to an average of 6.31% last week, it is still double what it was at this time last year.
Rates may begin to rise as the Fed signaled further rate hikes by the end of 2023, sending Treasury yields skyrocketing. Mortgage rates tend to move in lockstep with Treasury yields.
Wall Street stocks were trading higher. The dollar declined versus a basket of currencies after the Bank of Japan surprised markets by revising its yield curve management strategy and expanding the trading band for the 10-year government bond yield. US Treasury yields increased.
CONFIDENCE IS SINKING
Data released on Monday showed that single-family homebuilder confidence fell even further in November, lowering the National Association of Home Builders (NAHB)/Wells Fargo housing market index to its lowest level since June 2012, excluding the drop during the early days of the pandemic in the spring of 2020.
The increase in multi-family housing projects countered some of the drag from single-family housing units, resulting in a 0.5% drop in overall housing starts to 1.427 million units last month. Reuters surveyed economists predicted that housing starts would fall to 1.400 million units.
The Fed wants to decrease inflation by lowering demand for everything from housing to labor. The labor market has remained tight, but economists predict that it will begin to relax and eventually deteriorate next year, owing to the housing market.
For six consecutive quarters, the housing market has declined. Residential investment is predicted to subtract up to 0.7 percentage points from GDP this quarter.
The fourth-quarter growth rate is expected to be 2.8% on an annualized basis. In the third quarter, the economy increased at a 2.9% annual rate.
“Housing will play a significant part in the upcoming job market slowdown,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “After quickly recovering from the pandemic, employment in the residential building has virtually remained unchanged over the past half-year.”
Early in the pandemic, the single-family housing market flourished as Americans sought larger buildings to accommodate home offices. The pendulum has shifted back in favor of apartments.
However, multi-family housing is beginning to exhibit signs of deterioration. Permits for housing projects of five or more units fell 17.9% to 509,000 units, the lowest level since May 2021. Permits for single-family homes fell 7.1% to 781,000 units, the lowest level since May 2020.
Permits for future home development fell 11.2% last month to 1.342 million units, the lowest level since June 2020.
The number of dwellings sanctioned for development but not yet begun decreased by 2.0% to 293,000 units. The single-family homebuilding backlog fell 3.4% to 143,000 units, but the completion rate jumped 9.5% to 1.047 million units.
Under construction single-family housing inventory decreased by 1.3% to 777,000 million units, the lowest level since December 2021.
Higher mortgage rates decreased single-family homebuilding, and declining inventory might exacerbate an existing housing scarcity and impede the pace of house price declines, providing a challenge for the Fed.
“The limited available inventory, which is supported by both existing homeowners and homebuilders, will keep the market tight, price decreases moderate, and competition for attractive homes alive,” said Nicole Bachaud, an economist at Zillow in Seattle.
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